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Moving Fast

This note was originally published at 8am on November 01, 2012 for Hedgeye subscribers.

“The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow.”

-Rupert Murdoch

 

A friend of mine in Connecticut just sent me that quote. Like most of us on the East Coast, he’s up and at it early this morning. Risk happened fast. Now it’s time to slap on a pair of jeans, fire up our generators, and take on the day.

 

In The Signal And The Noise, Nate Silver calls out what physicist Didier Sornette alludes to as the “fight between order and disorder” (page 368). That fight isn’t new. However, through chaos theory, we are beginning to understand it more clearly.

 

Not unlike the world and its weather, I think about the Global Macro marketplace as one of interconnected factors that are colliding within a complex system. “Complex systems like this can at once seem very predictable and very unpredictable… they periodically undergo violent and highly non-linear phase changes from orderly to chaotic and back again.” (Silver, page 369)

 

Back to the Global Macro Grind

 

For most things Big Beta, October was gnarly. We won’t know what the fallout looks like on the buy-side until it’s old news. But the new news is that buying high-beta stocks and/or commodities at the Bernanke Top of September 14th, 2012 left a mark.

 

That’s not to say there weren’t what perma-bull marketing pundits tried to sell you yesterday morning as a “hurricane Sandy buying opportunity.” You just need to be selective about what you buy and when.

 

In the US stock market alone, look at the S&P Sector performance divergences for October 2012:

  1. SP500 = -2.0%
  2. Financials (XLF) = +2.0%
  3. Utilities (XLU) = +1.4%
  4. Basic Materials (XLB) = -2.1%
  5. Technology (XLK) = -6.3%

Markets rarely make perfect sense to me but, from a research perspective, these Sector divergences did.

  1. SP500 = bearish TRADE and TREND, so pervasive weakness into month-end made sense
  2. Financials = that’s the 1st Sector you buy if you think Romney wins (his closing the gap was enough, for starters)
  3. Utilities = that’s the low-beta trade that we recommended downshifting to last month; we’re still long it
  4. Basic Materials = get the Dollar right (Romney momentum = anti Bernanke momentum), you get commodities right
  5. Technology = Growth and #EarningsSlowing (our Top Macro Theme for Q412) matters, in the end

Where to from here? Let’s start with the Hedgeye Asset Allocation Model:

  1. Cash = 58%
  2. Fixed Income = 21% (Treasuries, Treasury Curve Flatteners, German Bunds – we still like them all during #GrowthSlowing)
  3. International FX = 15% (Strong US Dollar, stick with it unless it becomes clear that Obama is going to win)
  4. US Equities = 6% (Utilities and Financials we think continue to work; buy them on red)
  5. International Equities = 0% (with markets like Russia moving back into crash mode (-19.1% since March) we’re in no hurry)
  6. Commodities = 0% (we’ve been calling it Bernanke’s Bubble since March – sticking with it)

The asset allocation model isn’t for everyone. It’s actually for me. It’s how I think about my own money and what I am willing to put at risk at a given time and price. Since I own a lot of Hedgeye stock, my Cash position is overstated. This is meant to be a product whereby I can signal when/where I’d be adding to or subtracting from big liquid asset classes, on the margin.

 

The most important principle in my decision making process is uncertainty. I embrace it every minute of the day and reserve the right to change my mind, fast. That’s not for everyone. And I get that. I also get that, sometimes, it’s better than being slow.

 

After all, that’s what Rupert Murdoch is alluding to in the aforementioned quote inasmuch as the world’s largest sovereign governments have been reminding you of, almost daily, for the last 5 years. While Too Big To Move can be a problem for you when you have an 80 foot tree hanging on power lines across your driveway, you still need to be fast to adapt and change.

 

Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Technology (XLK), AAPL, and the SP500 are now $1691-1730, $107.41-109.09, $79.56-80.39, $1.28-1.30, 1.70-1.75%, $28.29-29.44, $586-616, and 1388-1419, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Moving Fast - Chart of the Day

 

Moving Fast - Virtual Portfolio


SJM 3Q12 CONF CALL NOTES

CONF CALL NOTES

  • EBITDA margin increase was due to the increase in mass market mix of their business
  • In late September, they added most of the gaming tables they have obtained from Satellite casinos to floors 9 & 10 of Grand Lisboa
  • Cotai expansion: 70,468 Meters of land. See completion 3 years after starting construction, hopefully in 2013.

 

Q&A

  • Tables that came out of Greek Mythology and went into Grand Lisboa didn't come online until the end of the quarter.  Their margins at GL decreased because the growth in VIP came from their largest junkets which get the highest commissions.  They also had to train staff from Greek Mythology before they were able to start producing revenue.  So you will see some net margin pressures next quarter as well but not as much as this quarter and there should be net revenue growth.
  • It's not easy to move tables from the their Satellite Casinos.  They are planning to add more tables at GL. There is a plan to renovate Jai Alai and that is one of the easier ways to move tables to their casinos.

 

HIGHLIGHTS FROM THE RELEASE

  • Adjusted Group EBITDA of HK$1,891MM and total revenue of HK$19,052MM
    • Gaming revenue: HK$18,892MM or 26.1% of the market
    • VIP gaming revenue: HK$13,314MM
      • VIP RC: HL$409BN; Hold: 3.05%
    • Mass market revenue: HK$6,040
    • Slot revenue: HK$370MM
    • 601 VIP tables and 1,158 Mass tables
  • Grand Lisbao gaming revenue of HK$7,315MM and Adjusted EBITDA of HK$1,148MM
  • Other self-promoted Casinos revenue of HK$2,591MM and Adjusted EBITDA of HK$271MM
  • Satellite Casinos revenue of HK$8,986MM and Adjusted EBITDA $HK$371
  • Cash: HK$24,880MM and Debt: HK$3,695MM
  • Comparable GAAP EBITDA margin of 17.3%.  "If the Group’s revenue is further adjusted to include the net revenue of self-promoted casinos plus the net revenue contribution (after reimbursed expenses) of the Group’s Satellite Casinos, the Group’s Adjusted EBITDA margin would be 29.4%."
  • Capex: HK$233MM

TAIL Time: S&P 500 Levels, Refreshed

Takeaway: This is the first time where we’re going to legitimately test our 1364 TAIL line of support. If that line snaps, buckle up.

This note was originally published November 14, 2012 at 11:59 in Macro

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)

 

Today is TAIL time. This is the first time where we’re going to legitimately test our 1364 TAIL line of support. If that line snaps, buckle up. Because there’s no real intermediate-term support from there to 1258.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE resistance  = 1391
  3. Immediate-term TRADE support = 1351

 

In other words, my model is already signaling that a breakdown through 1364 is probable. Meanwhile, my immediate-term Risk Range is flagging lower-highs and lower-lows for the first day since May (1351-1391).

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

TAIL Time: S&P 500 Levels, Refreshed - SPX


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

TAIL Time: SP500 Levels, Refreshed

Takeaway: This is the first time where we’re going to legitimately test our 1364 TAIL line of support. If that line snaps, buckle up.

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)

 

Today is TAIL time. This is the first time where we’re going to legitimately test our 1364 TAIL line of support. If that line snaps, buckle up. Because there’s no real intermediate-term support from there to 1258.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE resistance  = 1391
  3. Immediate-term TRADE support = 1351

 

In other words, my model is already signaling that a breakdown through 1364 is probable. Meanwhile, my immediate-term Risk Range is flagging lower-highs and lower-lows for the first day since May (1).

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

TAIL Time: SP500 Levels, Refreshed - SPX


Housing: Post-Sandy Surprise

Mortgage activity is bouncing back in the aftermath of Hurricane Sandy. Last week mortgage applications to buy homes rose +11% to an index level of 190. This compares with a decline of 5% in the previous week, reflecting the dislocation caused by Hurricane Sandy. Taken together, however, the two-week change was +5.45%, a fairly strong showing. 

 

Housing: Post-Sandy Surprise - MBA Apps  Shark

 

Refinance applications rose 13% following a decline of 5% in the previous week, snapping a 5-week streak of declines in the refi market. Housing continues to build momentum and prices are rising adequately as sentiment shifts; people prefer to own a home over renting. Thanks to the Federal Reserve, interest rates will remain low for a long period of time, helping to encourage lending.

 

Housing: Post-Sandy Surprise - Shark

 

Of course, the fiscal cliff looms on the horizon and should the automatic tax hikes go into effect along with spending reductions, that will hurt the market and slow the progress we’ve made since the 2008 crisis.

 

Housing: Post-Sandy Surprise - YoY


Playing The Debt Ceiling

The US Treasury is fast approaching its borrowing limit of $16.394 trillion; we expect the Treasury to hit that number within 35 calendar days or by December 17, 2012. While we're growing increasingly optimistic generally about the Financials post the Fiscal Cliff/Debt Ceiling, we think investors should have realistic expectations about what is likely to happen over the immediate/intermediate term. Based on the how things went in the last go-around, we would be positioned defensively in the short-term, and be looking to take advantage of the weakness once resolution if forthcoming.

 

Playing The Debt Ceiling - debtceiling1

 

Playing The Debt Ceiling - debtceiling2

 


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